2. Suppose that for a particular economy and period, investment was equal to 100,

government expenditure was equal to 75, net taxes were fixed at 100, and consumption

(C ) was given by the consumption function C=25+0.8YD where YD is disposable

income and Y is GDP.

2.1. What is the level of the equilibrium level of income? (Y) Is the economy running

with a trade deficit or trade surplus? How much?

2.2. What is the value of the government expenditure multiplier? Of the tax multiplier?

2.3. Suppose that investment declined by 40 units to a level of 60. What will be the

new equilibrium level of income?